*EPF509 03/14/2003
Senate Approves U.K., Australia, Mexico Tax Agreements
(Will reduce tax barriers to direct investment) (490)

Washington -- The U.S. Senate has approved ratification of updated bilateral tax agreements with the United Kingdom, Australia and Mexico that will further reduce tax barriers to direct investment between the United States and those countries.

The Senate approved ratification the evening of March 13, sending the agreements to President Bush for his signature. The pacts will enter into force after the United States exchanges instruments of ratification with the partner countries, each of which must also approve ratification according to its laws and procedures.

The agreements -- a new tax treaty with the United Kingdom and protocols to modify existing treaties with Australia and Mexico -- "will bolster the economic relationships between the United States and three countries that are already good friends and critical trade and investment partners," Senate Foreign Relations Committee Chairman Richard Lugar said during a March 5 hearing.

Under the new treaty and protocols, most dividends received by a parent company from an overseas subsidiary will be exempt from tax in the subsidiary's home country.

"Eliminating withholding taxes on the payment of dividends by an 80-percent owned corporation to its foreign parent corporation should greatly facilitate the flow of capital to its most beneficial uses," Lugar said. "More than 2,500 U.S. companies have subsidiaries in the United Kingdom, Mexico, or Australia that could benefit from this change."

The Bush administration supports the new agreements. In testimony during the March 5 hearing, Treasury Department International Tax Counsel Barbara Angus said the updated treaties "will strengthen and expand our economic relations with countries that have been significant economic and political partners for many years."

She said bilateral tax treaties generally aim to mesh the tax systems of the two countries to avoid disputes regarding the taxes owed to each. "The goal is to ensure that taxpayers do not end up caught in the middle between two governments, each of which would like to tax the same income," Angus said.

For the United States, another overall goal is to limit the tax benefits to bona fide residents of its treaty partners. The idea is to prevent "treaty shopping" by residents of third countries who sometimes establish entities in a treaty country to take advantage of the favorable rates provided by the tax treaty. Among other problems, treaty shopping reduces the incentive on some countries to negotiate a separate treaty with the United States, Angus said.

The United States has a network of 56 bilateral income tax treaties, the oldest of which dates from 1950. The network includes all 29 of the United States' fellow members of the Organization for Economic Cooperation and Development (OECD) and covers "the vast majority of foreign trade and investment of U.S. companies," Angus said.

The full text of her testimony is available on the Treasury web site at: http://www.treas.gov/press/releases/js86.htm

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

Return to Public File Main Page

Return to Public Table of Contents